Not Enough Hours Worked

May 04, 2003

By Rick MacDonald Outside of one key piece of data, the main components of the April

employment report, released May 2, were pretty much what Wall Street expected. Nonfarm payrolls fell 48,000 in the aggregate, a significant improvement compared to the nearly 500,000 jobs lost over the two prior months as the labor market was wracked by the "three W's" -- weather, war, and worry. The unemployment rate backed up to 6% from 5.8%, while hourly earnings revealed a modest 0.1% gain.

The report contained one big disappointment, however. The hours-worked component, which measures the average workweek for the U.S. labor pool, fell from 34.3 hours to 34 hours -- a level last seen in the trough of 2001's recession. This unexpectedly sharp drop suggests downside risk not only to other economic reports in the near term but to second-quarter growth as a whole. It also increases the likelihood of a Federal Reserve interest rate reduction by the summer, though we at MMS International still don't consider such a move very likely.

AND THE GOOD NEWS... The areas hardest hit with job losses were manufacturing, department stores, and three travel-related industries -- amusements and recreation, hotels, and air transportation. The travel group was expected, given the worries engendered by the Iraq conflict. Indeed, that job losses weren't more broadly based could be considered a good sign. Had they been greater across the board, it would have suggested a deterioration in underlying conditions. Nonetheless, few signs point to improvements in other areas. Manufacturing job losses totaled 95,000, more than double the average monthly decline of 40,000 for the prior 12 months.

Undoubtedly, the report's most encouraging part was that despite the increase in the unemployment rate, "household survey employment" -- a measure derived from data used to determine the unemployment rate -- rose an impressive 339,000. This measure shows that more than 1.25 million jobs having been added since the beginning of the year.

Still, the disappointing hours-worked figure clearly overshadows this positive news. The sharp pullback here combined with disappointing April auto sales sets the tone for another month of weak economic data -- despite initial hopes of a rebound from the weather- and war-related weakness of the two prior months. Specifically,

personal income is now expected to be flat, while previous expectations called for a solid gain of 0.4%. The closely watched wages and salaries component of the personal-income report is expected to reveal a hefty 0.3% decline.

industrial production as well. The headline figure for that report is expected to decline 0.2% in April. Previous expectations called for a gain greater than 0.4%.

The widespread weakness in hours worked has prompted downward revisions in our estimates for the second quarter. Employment hours are contracting in the second quarter at a 2% seasonally adjusted annual rate (SAAR), which is comparable to the declines seen during the recession of 2001. This will limit economic growth during the quarter.

We now expect real

gross domestic product growth of only 2.5% in the quarter, which has prompted us to push back the expected rebound in industrial production to the third quarter, when GDP growth should reach 4.5%. But the weakness in hours worked relative to growth suggests another impressive quarter for

productivity.

As for the Fed, the downgraded economic outlook suggests increased odds of a rate cut later this year, especially if the data remain weak. However, at MMS International, our best guess is that the early-year softness won't divert Alan Greenspan & Co. from maintaining a steady policy course in 2003. MacDonald is a senior economist for MMS International